Context

Increasing number of Start-ups and Unicorns in India.

Background

• India in the last few years has seen the boom of start-ups and unicorns.
• These entities are thought off as new growth engines of the country.
• The start-up culture in India’s economy though may not be a one shot panacea as is thought to be.

Analysis

What is a Start-up?

• The term start-up refers to a company in the first stages of operations.
• Start-ups are founded by one or more entrepreneurs who want to develop a product or service for which they believe there is demand.
• These companies generally start with high costs and limited revenue, which is why they look for capital from a variety of sources such as venture capitalists.

Venture Capitalist: is a private equity investor that provides capital to companies with high growth potential in exchange for an equity stake.

• A Start-up with valuation of $ 1 Billion is termed as Unicorn.

Why is India seeing the rise of start-ups?

• India’s demographic dividend has blessed it with population of such age group that has either not entered in the job market or is willing to leave the existing job and start a business.
• Government initiatives such as start-up India, stand-up India etc. These initiatives of the government focus on providing finance, training, market access, tax-breaks etc. to the entrepreneurs.
• Availability of investors, both foreign and domestic, whose purpose of financing start-ups is to gain multi-bagger returns.
• Increasing demand of products and services that can cater the needs of India’s expanding middle class.
• Telecom and IT revolution in India has made getting access to new products and services fairly easy and therefore generating customer base through a website or an app is not that difficult for the start-ups.

How can Start-ups help the Indian Economy?

• Start-ups are providing an opportunity to the entrepreneurial youth of India an opportunity to express their idea and grow their finances exponentially.
• Wealth creation has therefore become synonymous with start-ups.
• Establishment of a start-up brings with it growth in employment opportunities.
• Creation of products or services can cater the needs of a section of Indian population and make them economically more potent.

Example of above is the availability of online e-commerce platforms to traditional artisans who can now more easily reach their customers.

• These new business entities in some cases focus their attention on solving a regional or local issue or catering to a local demand.
• This results in creation of economic opportunities in places that are not traditional known for the same hence reducing regional disparity in economy.

Why start-ups are not a complete panacea to India’s economic woos?

• Statistically, a large number of start-ups do not make it big and are shut down.
• Closure of start-ups leads to lose of capital invested in them, employment of those working for and in them and also it sets a demotivating example for those willing to take chance by establishing a business entity.
  

  Why do start-ups fail? Journey of all the start-ups is not uniform. Some Start-ups are run-aways successes, while others meet success after some hustle and many of them end up failing. Some the reasons why many start-ups do not end up successful are- Weak business model followed by start-ups Poor planning by the entrepreneurs Faulty costumer insights Lack in originality of the idea which results in multiple products and services catering to the same demand. Lack of focus on the existing product and services under consideration or provided to the customers.

• Employment opportunities in start-ups, especially the ones that are technology and service based, are not proportionate to their valuation.
• Disparities in the salary and working conditions are also known to exist in the start-up ecosystem to a large extend.
• It is important to note that the founders and others in top level management of the start-ups take home huge pay outs that are proportional to valuation of the company but ordinary employees on the other hand receive less the bare minimum in name of optimum utilization of resources.
• The start-up sector being less regulated, has also led to no or minimum labour laws being applied to it.
• Most labourers working for the start-ups are not entitled to worker’s welfare legislations and therefore face exploitation.

Way Forward:

Start-ups are the new growth engines and money multipliers in the economy and hence they deserve to be promoted. Though giving them a complete free hand and living their employees out of labour legislation is not feasible. This would only create a situation that will lead to concentration of wealth in the hands of few.

Complete reliance on Start-ups for economic growth cannot be made as they too are and can be hit by business cycles and face contraction and/or closure.